Colombia - Industrial Restructuring and Development Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No: 18631 IMPLEMENTATION COMPLETION REPORT COLOMBIA INDUSTRIAL RESTRUCTURING AND DEVELOPMENT PROJECT (LOAN NO. 3321-CO) November 10, 1998 Finance, Private Sector and Infrastructure Sector Management Unit Country Management Unit for Colombia, Ecuador, Venezuela Latin America and the Caribbean Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS (As of December 1997) Currency Unit = peso US$1.00= 1,297.13 pesos GOVERNMENT'S FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS BR Colombia Central Banlk BVC Colombia value bonds CFP Popular Finance Corporation CFs Financial Corporations DFC Development finance company DNP National Planning Department ICR Implementation Completion Report IFI Instituto de Fomento Industrial (Industrial Strengthening Institute) INDEREMA Official Pollution Control Agency IPCN Environmental Policy Department IPCU Industrial Pollution Control Unit IRDP Industrial Restructuring and Development Project MED Ministry of Economic Development MOE Ministry of Environment PAL Labor Adjustment Assistance Project PFI Participating Financial Intermediaries QR Quantitative Restrictions SAR Staff Appraisal Report SENA National Vocational Training Agency TA Technical Assistance TPED Trade Policy and Export Diversification Loan ULC Unit labor costs UMI Industrial Monitoring Unit Vice President: Shahid Javed Burki Country Management Unit Director: Andres Solimano Sector Management Unit Director: Danny Leipziger Task Manager: James Hanna  FOR OFFICIAL USE ONLY IMPLEMENTATION COMPLETION REPORT COLOMBIA INDUSTRIAL RESTRUCTURING AND DEVELOPMENT PROJECT (LOAN NO. 3321-CO) Table of Contents PREFACE EVALUATION SUMMARY ................................................i PART I: PROJECT IMPLEMENTATION ASSESSMENT ................................................ 1 A. BACKGROUND .1 B. STATEMENT AND EVALUATION OF OBJECTIVES .1 C. ACHIEVEMENT OF OBJECTIVES. 4 D. MAJOR FACTORS AFFECTING THE PROJECT .10 E. PROJECT SUSTAINABILITY ~~~~~~~~~~................................................ 10 E. PROJECT SUSTAINABILITY.1 0 F. BANK PERFORMANCE I11 F . BANK PERFORMANCE ~~................................................ 11. . . . .. . . . . . . .. . . . . . . G. BORROWER PERFORMANCE . 11 H. ASSESSMENT OF OUTCOME . 11 I. FUTURE OPERATION . 11 J. KEY LESSONS LEARNED ................................................12 ANNEX 1 - MATRIX OF KEY PROJECT POLICY AND INSTITUTIONAL ADJUSTMENTS PART Il: STATISTICAL TABLES APPENDIX A: BORROWER CONTRIBUTION TO THE ICR .This document has a restricted distribution and may be used by recipients only in the performnance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.-_ .  IMPLEMENTATION COMPLETION REPORT COLOMBIA INDUSTRIAL RESTRUCTURING AND DEVELOPMENT PROJECT (LOAN NO. 3321-CO) PREFACE This Implementation Completion Report (ICR) reviews the Colombia Industrial Restructuring and Development Project (IRDP), for which a loan in the amount of US$200 million equivalent was approved on May 2, 1991 and made effective on July 31, i 992. The loan was closed in two phases - three of the Project's four components (credit program, industrial monitoring program, and environmental program) were closed on schedule according to the original closing date of December 31, 1996. As of August 28, 1998, US$182.9 were disbursed. The balance of US$17.1 were cancelled. The majority of this ICR was prepared in 1997 to address these areas. The fourth component, the Labor Adjustment Assistance Program, was completed on March 31, 1998, following one extension of the closing date, to permit the full implementation of this pilot effort, after which the ICR was completed. Preparation of this ICR is based upon several broad project impact surveys and interviews over 1997-98 with client firms by Econometria, a Colombian consulting firm, as well as further analyses based on a completion mission and review of the project file carried out in May 1998 by Mr. Manuel Lasaga, consultant, who also produced a first draft ICR. The review of the draft and completion of the ICR was done by James Hanna, current Task manager, with the assistance of Ms. Maria Victoria Lister and Ms. Lily Franchini. The borrower contributed indirectly to ICR preparation by providing extensive consultation with the ICR mission and directly to it by preparing its own report, which is included as Appendix A of this Report.  IMPLEMENTATION COMPLETION REPORT COLOMBIA INDUSTRIAL RESTRUCTURING AND DEVELOPMENT PROJECT (LOAN NO. 3321-CO) EVALUATION SUMMARY i. In February 19Y)), the Government of President Virgilio Barco set in motion a program to liberalize the external trade regime, accelerate the reform of public services and develop an internationally competitive private sector. The announcement mirrored the view held by many policy-makers and entrepreneurs that the achievement of Colombia's socio-economic objectives for the 1990s -- to accelerate economic growth and employment creation, lower prices to consumers, and further diversify the nation's export structure -- hinged on an elimination of trade barriers combined with less government interference in the domestic markets and the adoption by the private sector of more competitive strategies. The Bank's Industrial Restructuring and Development Project (IRDP) was part of a package of policy and institutional adjustments to facilitate the Government's program to liberalize the external trade regime and develop an internationally competitive private sector. Active preparation of the IRDP started in mid-1988 with the support of a Bank executed PHRD Grant and a highly participatory approach organized through sub-sector Working Groups. ii. Project Objectives. As stated in the Staff Appraisal Report (SAR) and in the Loan Agreement, the objective of the projzct was to increase the international competitiveness of the industrial sector in Colombia through the renovation, expansion and/or reduction of industrial production capacity. The IRDP incorporated policy changes and support programs for this purpose. On the former, it established at Board approval targets in the areas of quantitative restrictions on imports and tariffs rates in the trade regime to help limit backsliding, facilitated reorganization and liquidation in bankruptcy procedures for market exit, increased provisions for labor mobility under labor legislation, reduced forced investments and interest rate subsidies in the financial sector. In order to support the restructuring and development at the firm-level, the project was expected to support 250 investments under a credit program over a three-year period with a total cost of US$ 492 million. A technical assistance (TA) component of the project provided resources for public sector support of industrial restructurings. The TA was directed at: (i) development of a Labor Adjustment Assistance Program (PAL) to assist in the relocation of displaced workers executed by the Government's vocational training agency, SENA; (ii) establishment of a pollution control unit to monitor and enforce environmental regulations in the National Planning Department (DNP); and (iii) ongoing feedback and evaluation via an Industrial Monitoring Unit (UMI) within the Ministry of Economic Development. An amount of US$ 8 million was allocated to the TA component. iii. A pivotal factor in the successful design of the project was the diagnostic work performed through five in-depth sub-sector studies. The sub-sector analysis---currently better know as  ii cluster analysis---was a dynamic process, which brought together key government ministries, producer associations, industrialists, and bankers' associations through sub-sector working groups, which, through periodic meetings, provided a wealth of information on industry competitiveness as well as critical public policy recommendations. As the lessons from past Bank industrial restructuring operations have indicated, these complex projects need to be precedecl by careful diagnosis and analysis of private sector potential and obstacles to development.I iv. Achievement of Objectives. The achievement of the policy conditionality as agreed with the borrower is considered satisfactory. Basically, all the policy reforms were adopted prior to loan effectiveness, and they were maintained during its implementation. The trade regime continues to be within agreed parameters and new labor legislation and regulations approved in 1991 have been maintained. The more important measures included greater flexibility in the transfer and dismissal of workers, in the negotiation of labor con.racts, and elimination of inefficient rules that limited the ability of one enterprise to apply differential compensation rates across production facilities. The Government raised interest rates on industrial directed credit substantially to market equivalent, eliminated altogether the use of directed credit and transferred most of the portfolio to the Instituto de Fomento Industrial (IFI). V. The credit component of the IRDP financed 264 sub-projects for an approved value of the sub-loans of US$254.3 million. The Bank's component was US$178 million, or 70 percent of the sub-loan amount. There was a fairly high degree of concentration by loan value, in that 10 sub-loans accounted for 60 percent of the total amount of the Loan. However, by number of loans, the program was substantially oriented to small- to mid-sized enterprises, with approximately 60 percent of the sub-loans being under US$100,000. This reflects the fact that, even though Colombia experienced strong capital inflows during this period, they were not readily available for long-term investments by small and medium-scale firms intermediated by medium-sized financial institutions. The program's access advantage was also reinforced according to client surveys to the improvement in technology achieved through the acquisition of machinery and equipment, which in turn led to improved quality of final products. vi. A survey of firms participating in the Project showed that the IRDP's results were positive. About 60 percent of the enterprises financed by the Project's credit program reported an increase in their productive capacity, and a similar share experienced an increase in labor productivity. The impact of labor reforms supported by the Project, appears also to have had quite a favorable enabling impact on firm behavior. Overall, the Survey reported that 70 percent of the firms viewed the labor policy reforms as a positive influence on the economy. About 45 percent of these firms increased employment, 40 percent did not change, while virtually none reduced their net workforce. vii. T'he Industrial Monitoring Unit was established within the Ministry of Economic Development (MED) in 1993 and, after adjustments, performed according to expectations. lSee Mathieu, ibid.  iii Subsequently, a private consulting firm, Econometria, was hired to monitor industrial trends and published in-depth analyses of industrial competitiveness as well as information on international market trends. Under the environmental component, in addition to its contribution to institutional building, it strengthened the legal framework for industrial pollution control in air and water quality standards. Multiple seminars, workshops and conferences were offered mainly on air and water pollution control, solid waste and hazardous waste management, groundwater pollution, enforcement of pollution standards, and economic incentives to pullution control. In some areas, such as the water and pollution control legislation, economic incentives for pollution control and sectoral pollution control strategies, the pace of implementation much exceeded expectations. viii. The accomplishments of the Labor Adjustment Assistance Program (PAL) are considered partially satisfactory in relation to its original objective. The PAL was developed under the Project as a highly innovative pilot program to facilitate social adjustment to the industrial restructuring process. It was designed as a Jow-cost, demand-based program partnership financed by private sector firms and the Government with the specific aim of shortening the time between jobs and reducing the social costs of adjustment for workers in firms who are displaced by restructuring programs. A total of 75 )rograms were undertaken by 63 different firms involved about 16,000 workers. Survey and interview work revealed that the immediacy of the threat of layoff varied considerable among PAL programs. However, across this spectrum, interviews reflect broad management and worker satisfaction with the Program, which supported firm-wide industrial restructuring initiatives which, often in combination with other firm investments, frequently helped to improve productivity and product quality. The PAL was often structured around a firm seeking ISO 9000 certification and in some cases, supported training where little such initiative had preceded it, or resulted in subcontracting relationships with former employees. The evaluation suggests that firms already having reached the stage of having to layoff workers did not perceive a strategic interest in helping exiting workers minimize the socio- economic cost of dislocation. On the other, as a demand-based mechanism, the PAL succeeded in supporting initiatives of participating firms to tailor-make programs to upgrade labor productivity and improve the business environment for their workers. ix. Bank and Borrower Performance. Bank and borrower performance in the IRDP were both satisfactory. Project identification, preparation, and appraisal by the Bank met expectations in terms of organization, responsiveness, and analytical quality. One of the distinguishing characteristics of this project was the permanence of the task-manager from identification through the closing of the loan. In addition, from the start, the government was highly committed to this project and its ownership was clearly in its hands. This commitment was also evident in the strong support given to Bank missions throughout project implementation. x. Overall Outcome. On the basis of the review of this project, including the review of legal documents, supervision reports, and the findings of the ICR mission, the IRDP is rated as satisfactory. The project achieved its major objectives, particularly the near-term objective, since it is still too early for a definitive assessment. One of the distinguishing characteristics of this operation was the efficiency of the outcome. All of the policy reforms were implemented  iv prior to loan effectiveness. Compliance with specific loan covenants was satisfactory. With strong governrnent commitment to the policy reforms under the Project, one of the factors critical to its success and continuity, and its long-established credibility in the management of macroeconomic policy, sustainability of project achievements is considered likely. Key Lesst,ns Learned: o Implementation of nolicy reforms prior to loan approval enhances the likelihood of a successful outcome. .n the case of the IRDP, all policy reforms were implemented prior to Board presentation. The project thus focused on the maintenance of those reforms. o Ongoing monitoring of relevant project information is critical to the success of the implementation process. The UMI, designed as a monitoring and evaluation unit, served a very useful purpose in gathering key industrial information and in preparing informative as well as insightful reports on trends affecting international competitiveness within the project itself: o Dissemination of project information and effective consultations with market players is important during project implementation. In view of the extensive research and valuable information produced by the UMI, a more useful approach may have been periodic, perhaps quarterly, seminars for executives to discuss the latest trends in the industrial sector. O Flexibility in conditionality assures continuity of the project while avoiding tense relations between the Bank and the borrower. An innovative condition of the IRDP was that sub-loan comrnitments and disbursements under the credit program to the automotive sub-sector were subject to the government adopting a liberalization of the vehicle assembly industry. If this requirement had been a part of project-wide conditionality, the project outcome might have been less successful. o The establishment of environmental screening mechanisms is a common strategy now used in the Bank for FILs and sectoral investment operations. However, these procedures need to be fully spelled out in project documents as well as complete agreement reached among all relevant actors. O The design of labor adjustment assistance programs may utilize a strategy which focuses exclusively on workers following layoff decisions or more upstream as part of firms' efforts to regain market competitiveness and forestall layoffs.. Eligibility criteria need to be carefiully defined to fit the target clientele, strategy and performance expectations adopted. The design should also be very carefully tailored to the corporate culture of the country involved, in particular ensuring that it is compatible with labor-management relations and layofif practices. Also, institutional commitment to and its efficient internalization of such an innovative program needs to be particularly strong when it integrally depends upon private sector collaboration for its success.  IMPLEMENTATION COMPLETION REPORT COLOMBIA INDUSTRIAL RESTRUCTURING AND DEVELOPMENT PROJECT (LOAN NO. 3321-CO) PART I: PROJECT IMPLEMENTATION ASSESSMENT A. BACKGROUND 1. In February 1990, the Government of President Virgilio Barco set in motion a program to liberalize the external trade regime, accelerate the reform of public services and develop an internationally competitive private sector. The announcement mirrored the view held by many policy-makers and entrepreneurs that the achievement of Colombia's socio-economic objectives for the 1990s -- to accelerate economic growth and employment creation, lower prices to consumers, and further diversify the nation's export structure -- hinged on an elimination of trade barriers combined with less government interference in the domestic markets and the adoption by the private sector of more competitive strategies. The Government's sound macroeconomic management since the mid-1980s thus provided a generally adequate framework in which to pursue an industrial restructuring strategy. The Government of President Cesar Gaviria, which took office in August 1990, reaffirmed its support for this program and accelerated its implementation. 2. The Bank's Industrial Restructuring and Development Project (IRDP) was part of a package of policy and institutional adjustments to facilitate the realization of this program. The IRDP was designed in close collaboration with the private sector, and represented a significant departure from previous Bank support for industrial developmer. in Colombia. Active preparation of the IRDP started in mid-1988, with the support of a Bank-executed PHRD Grant and a highly participatory approach organized through Sub-sector Working Groups consisting of representatives of Government agencies, private industrialists and the financial sector. B. STATEMENTAND EVALUATION OF OBJECTIVES 3. As stated in the Staff Appraisal Report (SAR) and in the Loan Agreement, the objective of the project was to increase the international competitiveness of the industrial sector in Colombia through the renovation, expansion and / or reduction of industrial production capacity. Its immediate objectives were to assist the private sector in changing the production mix toward goods in which Colombia has a dynamic comparative advantage, by: (i) renovating existing industrial production capacity so as to reduce costs; (ii) building new capacity, increasing product quality and service; and (iii) phasing out production of those goods which were unlikely to produce acceptable long-run returns in a competitive business environment.  2 4. The basic strategy to achieve these objectives was to adopt a set of public policy adjustnments which would increase the competitiveness of the domestic business environment and to enable a set of enterprises to respond accordingly by making available financial, technical and social resources to help industrial enterprises restructure and develop their operations. 5. The public policy component consisted of adjustments in external trade, domestic competition, financial sector and labor. In this regard the IRDP provided continuity with the earlier TPED loan which emphasized trade reforms. However, the IRDP was designed differently as a hybrid of sector adjustment and project financing. This project structure supported the Government's broad policy reforms while helping to assure that participating firrns in the industrial sector could adapt to the new environment. All of the recommended policies were adopted prior to Board approval. The principal action steps were as follows: Trade Policy: L Set targets as benchmarks against backsliding in the areas of quantitative restrictions (QRs), average tariffs (max 16 percent) and number of tariff rates (four). Domestic Competition Policy: L Revise existing legislation to expedite bankruptcy procedures, and thus provide an incentive for firms to act proactively in restructuring their operations in order to avoid insolvency. L Eliminate price controls on production of cotton in order to improve access to raw materials by the textile and apparel industries. L Adopt a deregulation program for the auto and commercial vehicle parts industry. Labor Regime: o Revise existing legislation to increase labor mobility, specifically reduce employer liabilities in the event of worker dismissal and to allow differential wage scales within a single firm. o Establish a Labor Adjustment Assistance Program (PAL) to assist those workers who have been laid off as a result of industrial restructuring. Financial Sector: o Reduce the use of forced investments and reserve requirements to support directed credit. E Eliminate interest rate subsidies on Banco de la Republica (BR) industrial credit lines, and raise the maximum lending rates to enterprises to DTF + 6 percentage points. 6. In order to assist the restructuring and development of private sector enterprises, the project was expected under a credit program to support 250 investments over a three-year period with a total cost of US$ 492 million. From the Bank's loan of US$200 million, an amount of 2 See Policy Matrix in SAR, March 20, 1991, Report No. 8633-CO, and Pg. 74-79.  3 US$ 192 million would be available to finance 70 percent of the amount of sub-loans granted by participating financial intermediaries (PFIs) to industrial enterprises or 40 percent of total estimated project costs. 7. A technical assistance (TA) component of the project provided resources for public sector support directed at: (i) development of the Labor Adjustment Assistance Program (PAL) to assist in the relocation of displaced workers; (ii) establishment of a pollution control unit to monitor and enforce environmental regulations; and (iii) support the operations of an Industrial Monitoring Unit (UMI) within the Ministry of Economic Development. An amount of US$ 8 million was allocated to the TA component. 8. An important part of the Project's design was the diagnostic work performed through five in-depth sub-sector studies which provided a wealth of information on industry competitiveness as well as critical public policy recommendations. The five industries were: textiles & apparel, shoes and leather goods, agro-industry, iron and steel, and vehicle assembly and parts. It was made clear to all that "picking winners" did not underly these choices, but criteria which included the sub-sector's importance relative to total industrial output, coverage of a wide-cross section of activities such as consumer, intermediate, capital goods, and a wide course of firm size. A Japanese PHRD Grant financed nearly all of project preparation. The sub-sector studies were subsequently utilized during implementation to help the UMI carry out its monitoring of industrial competitiveness, a task that was financed through the loan's TA component. 9. The sub-sector analysis was a dynamic process, which brought together key government ministries, producer associations, industrialists, and bankers' associations through sub-sector working groups, which, through periodic meetings, provided very valuable input in the preparation of the consultants' studies. As the lessons from past Bank industrial restructuring operations have indicated, these complex projects need to be preceded by careful diagnosis and analysis of private sector potential and obstacles to development.3 This process was particularly helpful in identifying policy reforms in labor legislation, as it became apparent that modifications were essential to the supply response. The labor component of the policy reform matrix among others was derived from a combination of the consultant work associated with the sub-sector studies which assessed the impact of the labor code from the firm level, and specialize analyses by labor lawyers who evaluated the overall code. 10. The core of the financial sector reforms dealt with the determination of interest rates, specifically the dismantling of interest rate subsidies on directed lines of credit, and the use of the so-called forced investment regulations applied to commercial banks. According to the SAR, the interest rate subsidy had averaged 12 percentage points during 1981-1987. Directed credit accounted for about 62 percent of total credit to manufacturing by commercial banks and finance 3 See Mathieu, ibid  4 companies. Interest rate subsidies, combined with the forced investment regulations, had discouraged medium- to long-term lending by the financial sector. 11. The technical assistance component was designed to support the Government's program managernent requirements in the following areas: (i) an Industrial Monitoring Unit (UMI) within the Ministry of Economic Development (MED); (ii) a Labor Adjustment Assistance Program (PAL); and (iii) an environmental pollution control unit in the National Planning Department (IPCU). The creation of the UMI aimed to both inform policy makers of trends in Colombia's international competitiveness and monitor project progress. This unit benefited in large part from the diagnostic work under the sub-sector studies, and its design properly captured the importance of data gathering and analysis during the implementation stage. The Labor Adjustment Assistance Program, as designed, offered an innovative response, adapted from the Canadian Industrial Adjustment Service, to the problem of unemployment that was expected to arise from industrial restructuring. However, as later implementation experience demonstrated, more attention might have been paid at the outset to adapting the Canadian program to the Colombian environment and to the allocation of administrative resources to this initiative. 12. The design of the environmental component suffered from a lack of adequate institutional capacity at the time of appraisal, and the resistance by BR to perform environmental assessments of sub-projects. On the other hand, the creation of the IPCU proved to be a pivotal transitional resource in the subsequent establishment of the Ministry of the Environment. Considering the lack of implementing capacity, both human and financial resources, Project designers correctly opted to help reinforce the Government's central environmental management capacity rather than insist on sub-project evaluations which might have detained the achievement of the Project's principal financing objective. At appraisal, under the initiative of DNP, the Government was preparing a draft law to be presented to congress by mid-1991 that would call for the establishrment of a new Ministry of the Environment. This set the stage, as understood at that time, for the subsequent successful incorporation of the unit into the ministry when it was t. tablished. C ACHIEVEMENT OF OBJECTIVES 13. Based on the overall objective of enhancing the international competitiveness of Colombia's industry, the IRDP can be considered successful at the time of this evaluation. Nevertheless, this analysis is only a progress report on the realization of that objective, since a definitive conclusion is not possible in the short period of time since the loan's closing, especially when such an evaluation encompasses a wide array of quantitative as well as qualitative factors that also evolve over time. As stated in the OED report, industrial restructuring is a long-term response to economy-wide adjustment. That report also states that macroeconomic stability has a major impact on the restructuring process. In this regard, Colombia's stable macroeconomic environment, coupled with a strong government commitment to reforms, has been instrumental in the successful outcome of the Project, and bodes well for its sustainability.  5 14. The achievement of the policy conditionality as agreed with the borrower is considered satisfactory. Basically, the following policy reforms were adopted prior to loan effectiveness and maintained during its implementation: * Trade Regime - Colombia's trade regime is substantially consistent with the reforms adopted in 1991 and the maintenance conditions in the Project. he average import-weighted tariff is 11.5 percent, compared with a condition that such a rate would not exceed 16 percent. There are five tariff categories -- 3, 5, 10, 15, and 20 percent, compared to a commitment that the number of categories would be reduced to no more than four from the 23 levels at the beginning of the reform program; * Domestic Competition - The elimination of price controls on domestic cotton production was achieved shortly after Board presentation and price controls have not been re-imposed. With respect to the vehicle assembly and auto parts sector, a condition of first disbursement to such enterprises was reduce domestic content requirements in local production. To this point, the Government has resisted any such changes, and consequently no sub-loans were made to the automotive firms; - Labor Regime - New labor legislation and regulations approved in 1991 have bee maintained. The more important measures included greater flexibility in the transfer and dismissal of workers, in the negotiation of labor contracts, and elimination of inefficient rules that limited the abil:Py of one enterprise to apply differential compensation rates across production facilities; - Financial Sector - The steps required prior to Board presentation were to (i) raise interest rates on industrial directed credit managed by the BR to at least DTF to intermediaries and DTF+6 to sub- borrowers (both, substantially market equivalent); and (ii) deregulate directed credit schemes. This was done and the Government went further by eliminating altogether the use of directed credit and transferring most of the portfolio to the Instituto de Fomeh o Industrial (IFI). 15. The credit component of the IRDP financed 264 sub-projects for an approved value of the sub-loans of US$254.3 million. The Bank's component was US$178 million, or 70 percent of the sub-loan amount. The weighted average term for fixed assets financing was 7.8 years with an interest rate spread of 3.7 percentage points. While 10 sub-loans accounted for 60 percent of the total amount of the Loan, there was an otherwise strong focus on small- to mid-sized enterprises as approximately 60 percent of the 264 sub-loans financed by the project were under US$100,000. Financing of fixed assets comprised 91 percent of the loan, the rest was for working capital, which concurs with the loan's objective of supporting restructuring activity. Most of this went to purchase new machinerj and equipment often embod-ing higher levels of technology. 16. About 90 percent of the Loan was disbursed to 9 industries: food and beverages 61.9 percent; wood processing 6.1 percent; textiles & apparel 3.8 percent; healthcare services 4.8 percent; printing & publishing 3.9 percent; hotels 3.9 percent; non-metallic minerals 2.6 percent; telecommunications 1.5 percent; and chemicals 1.0 percent. According to the Econometria  6 survey, one of the key outcomes of the credit component was the improvement in technology through the acquisition of machinery and equipment, which in turn led to improved quality of final products. 17. Two surveys performed by a local consulting firm for the ICR on a sample of sub- borrowers of the credit program and the clients of the PAL and the final report of the implementing agency4 suggest a positive overall impact by the Project. The intentions of the majority of borrowers was to increase competitiveness, including by gaining economies of scale with added production capacity and penetrating new markets. The majority stated that such investmeents had a strong positive impact on production processes (70 percent), production capacity (65 percent), sales (60 percent), and profitability (65 percent), improving such things as labor productivity, the efficiency in use of raw materials, utilization of physical space, product quality and marketing. Typically, this did not involve new product innovation (65 percent) or organizational reforms (80 percent), but resulted more from technical process innovation (70 percent) and development of new markets (60 percent). 18. In addition, the UMI reports prepared throughout the Project concluded that the industrial sector was positively impacted by several the Governmnent's major policy reforms during the early 1990s which were supported by the IRDP. The UMI looked at indicators of production, productivity, and unit labor costs (ULC), as well as the balance of trade for 26 sub-sectors in their evaluation of changes in competitiveness.5 Based on this analysis, overall industrial production grew by an average rate of 3.9 percent per annum during 1992-1995. Productivity grew at an average rate of 4.1 percent, while labor costs, as measured by ULC, grew at a moderately slower pace of 3.4 percent. The Survey, prepared for the ICR, though providing less specific data, shows that the enterprises financed by the Project's credit program also had positive results. About two-thirds of the firms reported an increase in their productive capacity, and 60 percent experienced an increase in labor productivity. 19. Based on the Surveys, 60 percent of the firms viewed the trade liberalization policies as having had a positive impact on their business. With respect specifically to the simplification and reduction in tariffs, 50 percent considered them as having been positive and 40 percent as having been neutral to their business. Two sub-sectors, food processing and textiles & apparel which were hit harder than most by imports, did respond negatively to the effects of trade 4 The corisultant's survey report was prepared by a firm that also played an instrumental role in the development of the Industrial Monitoring Unit, Proyecto de Reconversion y Desarrollo Industrial Colombiano: Evaluacion del Impacto del Credito BIRF, by Econometria, August, 1997 (the Survey); and the other report was prepared by the implementing agency, Banco de la Republica, Informe de Evaluacion del Proyecto Linea BIRF 3321-CO, April 28, 1997 (the BR Report). 5Two studies, which appeared in the UMI's publication Indicadores de Competitividad de la Industria Colombicna, provide detailed information on developments in the industrial sector. See "La Industria Colombiana," August 1996, and "Competitividad de los Sectores Industriales," December 1996.  7 liberalization. The impact of the Government's labor reforms aimed to increase factor mobility and flexibility, appears also to have had quite a favorable enabling impact on many firms. Overall, the Survey reported that 70 percent of the firms viewed the labor policy refornns as a positive influence on the economy. About 45 percent of the firms increased employment, 40 percent did not change, while virtually none reduced their net workforce. Apparently, the increased flexibility in labor management introduced by the 1990 law, combined with moderate increases in real wages and increased capital investments that were in part financed through the IRDP, did contribute to increases in international competitiveness and labor productivity. 20. Regarding the TA program, the industrial monitoring unit component (UMI) was established within MED in 1993. Periodic reports were issued by the UMI in 1993. However, at the end of 1993, the MED restructured the UMI by closing down the analytical operation within the Ministry, naming a new Coordinator, and to alleviate political influences over the unit, subcontracting the remainder of the operation to a private firm. After an effective and speedy selection process, a contract was signed with a private firm, Econometria, in February 1994. 21. As part of its assigned responsibilities, Econometria published a quarterly periodical "Indicadores de competitividad de la Industria Colombiana", which was distributed to industrial enterprises, financial institutions, business organizations, and government agencies. This periodical contained in-depth analyses of industrial competitiveness as well as valuable information on international market trends. The information contained in these bulletins was also valuable to the Bank in measuring the impact of the IRDP on the industrial sector. In view of the challenges faced by the Bank in monitoring its own lending operations, greater consideration should be given to a UMI-type of arrangement in other Bank projects. 22. At the same time, more benefits could have been gained from UMI analyses. Several recommendations were made to pursue a more proactive approach with Government and producer associations on the influence of specific public policies and institutions on firm competitiveness. Between October and November 1994, the MED did invite industrial associations and entrepreneurs from the majority of the industrial sectors to attend several meetings to identify the main problems arising from the Apertura Program. Still, a more useful approach may have been to use UMI work as a basis for periodic seminars for executives to discuss the latest trends in the industrial sector and to seek their comments in terms of their own experiences. In addition, it might have also been productive if MED had encouraged continued publication of UMI work via its privatization. 23. The environmental component was particularly effective in building institutional capacity. The principal instrument to implement these objectives was the establishment of an Industrial Pollution Control Unit (IPCU) within DNP in order to assist with the design and implementation of industrial pollution control programs. Initially, it was necessary to establish the IPCU within DNP due to the poor implementation record of the official pollution control agency (INDEREMA). When the Environmental Law of 1993 created the Ministry of the Environment (MOE), and thus eliminated INDEREMA, the IPCU played an instrumental role in  8 the institutional development of the new ministry. Many of the rules and regulations that were subsequently adopted by MOE were originally developed by the IPCU. 24. In addition to its contribution to institutional building, the IPCU contributed to increased awareness of the environmental challenges facing the country. Efforts towards strengthening the legal and institutional framework for industrial pollution control were consolidated with substantial progress made in air and water quality standards. Multiple seminars, workshops and conferences were offered mainly on air and water pollution control, solid waste and hazardous waste mnanagement, groundwater pollution, enforcement of pollution standards, and economic incentives to pollution control. In some key areas such as the water and pollution control legislation, economic incentives for pollution control and sectoral pollution control strategies, the pace of implementation far exceeded expectations. 25. The only element of the environmental program not implemented as expected was regarding environmental assessments of sub-projects. Contrary to understandings at project appraisal, the IPCU did not have the legal authority to perform its responsibilities. The Bank's environmental guidelines, OD 4.00, had just been introduced at the time of appraisal. Nevertheless, given simultaneously the urgency of supporting industrial restructuring and the limited environmiental assessment capacity, it was agreed that a component would be managed by DNP so as to focus on the highest priorities for pollution control, whether or not they were projects financed by the IRDP credit program. In addition, the implementing agency, BR, was adamant about not assuming any responsibility for environmental evaluations, nor requiring financial intermediaries to do so. Their position was that this type of activity went beyond the normal scope of financial intermediation. A subsequent ex-post evaluation of 15 sub-projects did not reveal significant environmental issues. 26. 'The Labor Adjustment Assistance Program (PAL was developed under the Project as a highly innovative pilot program to facilitate social adjustment to the industrial restructuring process. It was administered by SENA (the national vocational training agency) under the Ministry of Labor and Social Security. It was designed as a low-cost, demand-based program partnership financed in equal shares (later modified to a 40/60 relationship) by private sector firms and the Government with the specific aim of shortening the time between jobs and reducing the social costs of adjustment for workers in firms who are displaced by restructuring program's. It was intended to finance mainly the partial cost of self-assessment and career counseling, job search, short-term retraining and entrepreneurship development programs. 27. The initial implementation of the PAL, adapted from the Canadian Industrial Adjustment Service model, suffered from inadequacies in the oriainal effort to adapt this model to Colombian conditions and from the process of restructuring SENA itself, which took place over 1992-94 and left the PAL substantially without sponsorship over this period. However, these problems were substantially alleviated when the Program was restructured in 1995 after extensive dialogue with the new Government. Learning from initial implementation difficulties, the changes entailed mainly (a) the elimination of the labor committee concept, given the  9 frequently difficult working relations between management and labor in Colombia and lack of tradition of working in this concerted style; (b) a broader programmatic eligibility, offering support to firms at risk of having to displace workers in addition to those who have already negotiated and declared redundancies; (c) new management and a new administration system, separate from SENA but operating in close coordination with its Employment Department. The system, produced with the help of Arthur Anderson Consulting, included streamlined operational procedures and contracting, PAL management and program performance indicators, and new progress monitoring and financial procedures; and (d) development and implementation of a new PAL promotion program. 28. Subsequently, level of commitments achieved rose from 11 firm-level programs involving about 1,300 workers to a total of 75 programs at the Project's closing date undertaken by 63 different firms involved about 16,000 workers. According to surveys, of the total number of beneficiaries, about 72% participated in self-assessment and career counseling, 48% in skills upgrading and occupational retraining, and 17% in entrepreneurship development programs. Contrary to the original aims, the majority of these activities used a group-based approach to skills upgrading to address broad productivity problems within the firm rather than individualized assistance to find new jobs elsewhere. About 7% of participants were severe-' from employment with the firms participating in PAL, of which 9 of 10 had found jobs in other firms, while the remainder stayed within the same job or secured a new job in the PAL- participating firm. The average time for those dislocated to find a new job was 7.6 weeks, which is relatively short in relation to the average period of unemployment in general in Colombia. A number of the participating firms dislocating employees reported that the PAL was very supportive for both parties in facilitating resolution of difficult labor issues. For those employees remaining in participating firms who were interviewed during the evaluation, 11% had increases in salary (mostly related to those who had moved within the firm) and 96% considered that they had acquired knowledge applicable to assume new responsibilities. 29. The broadening of eligibility of firms and workers for PAL assistance from essentially curative efforts to include preventative restructuring strategies was the main driver of the growth of PAL following its own restructuring. Detailed interviews with 28 firms following survey work revealed that the immediacy of the threat of layoff varied considerable among PAL programs. However, across this spectrum, interviews reflect broad management and worker satisfaction with the Program. In seemingly all cases, the PAL was reported to positively support firm-wide industrial restructuring initiatives which, often in combination with other firm investments, frequently helped to improve productivity and product quality. In this regard, PAL was often structured around a firm seeking ISO 9000 certification and in some cases, supported training where little such initiative had preceded it, or resulted in subcontracting relationships with former employees. The evaluation suggests that firms already having reached the stage of having to layoff workers, did not perceive a strategic interest in helping exiting workers minimize the socio-economic cost of dislocation. On the other, as a demand-based mechanism, the PAL succeeded in supporting initiatives of participating firms to tailor-make programs to upgrade labor productivity and improve the business environment for their workers.  10 D. MAJOR FACTORS AFFECTING THE PROJECT 30. The main success of the IRDP is attributed to a strong government commitment to its policy changes and programs and to a solid working relationship between the Bank and the government. Government's strong commitment to the reforms contributed to a high credibility factor early on in the process and to the better than expected outcome from the macroeconomic adjustment. At the time of Board presentation in May 1991, all of the policy reform measures had been put in place, including those requiring legislative action. Borrower ownership of the Project was instrumental in achieving these results. In 1990, at a time when the loan was at an advanced stage of negotiations, a new government took office with an even stronger commitment to trade reforms. Excellent macroeconomic management contributed to a favorable environment for restructurings. GDP growth averaged 4.6 percent during 1992-1996, with a stable but high inflation rate of 23 percent. 31. The implementing agency, BR, complied diligently with the credit program as per the Loan Agreement. However, at the time of loan approval, it was going through a transition from a mu..a-faceted monetary authority with direct lending capabilities, to a single-purpose central banking entity. In fact, in May 1994, BR informed the bank of its intention to eliminate its external credit line management, in line v Ith its new mission statement, and suggested the transfer of the credit program to IFI. Concerned about management efficiency and continuity of the credit component which was well into implementation, the Bank and BR agreed that it maintain its role through the completion of commitments of sub-loans. E. PROJECT SUSTAINABILITY 32. Bly its nature, an industrial restructuring project has a significantly higher risk factor than other Bank industrial finance projects. For this reason, Bank staff devoted a considerable amount of resources during the identification and appraisal stages of the project in order to assure a successfal outcome. Project sustainability based on the objective of increasing the competitiveness of Colombia's industrial sector, and the near-term objective of assisting the private sector in renovating existing industrial production capacity is considered likely. Strong government commitment to the policy reforms has been one of the factors critical to its success and continuity. The Government's long-established credibility in the management of macroeconomic policy bodes well for the sustainability of the project. Nevertheless, this assessment is based exclusively on an evaluation of the current government's economic policies, specially the apertura program.  11 F. BANK PERFORMANCE 33. Bank performance in the IRDP was satisfactory. Project identification, preparation, and appraisal exceeded expectations in terms of organization, responsiveness, and analytical quality. One of the distinguishing characteristics of this project was the permanence of the task-manager from identification through the closing of the loan. Continuity of Bank staff is important in terms of nurturing the Bank - Borrower relationship and the capacity to make mid-course adjustments without compromising the original objectives. Staff turnover coupled with changeover in government can jeopardize the final outcome G. BORROWER PERFORMANCE 34. Borrower performance during the IRDP is also considered satisfactory. From the start, the government was highly committed to this project. Ownership of the program was clearly in the hands of the government. During preparation and appraisal the government provided extensive cooperation. This commitment was also evident in the strong support given to Bank missions throughout the period of the loan. H. ASSESSMENT OF OUTCOME 35. On the basis of the review of this project, including the review of legal documents, supervision reports, and the findings of the ICR mission, the IRDP is rated as satisfactory. The project achieved its major objectives, particularly the near-term objective, since it is still too early for a definitive assessment. One of the distinguishing characteristics of this operation was the efficiency of the outcome. All of the policy reforms were implemented prior to loan effectiveness. Compliance with specific loan covenants was satisfactory. Sustainability of the objectives is considered as likely. I. FUTURE OPERATIONS 36. Continuity of the IRDP's objectives could however be challenged by the following two factors: (i) additional capital needs by the industrial sector in order to achieve the desired level of competitiveness, but a lack of long-term financial resources in the terms comparable te those provided by this loan; and (ii) continued real appreciation of the peso followed by an abrupt adjustment to the currency which could overturn the financial advantage of dollar-based financing. This project was designed as the last of its kind in Colombia, there are no plans for future country operations in this area.  12 J. KEY LESSONS LEARNED 37. Some of the key lessons learned from this project are: o Implementation of policy reforms prior to loan approval enhances the likelihood of a successful outcome. In th_ case of the IRDP, all policy reforms were implemented prior to Board presentation. The project thus focused on the maintenance of those reforms. A particularly difficult condition for disbursements is the passage of legislation, since it requires a degree of expertise on the political process, which goes beyond the Bank's economic development capabilities. The IRDP included passage of labor code reforms as conditions to Board approval, and thus avoided the treacherous position of conditioning future disbuirsements on passage of legislation. O Ongoing monitoring of relevant project information is critical to the success of the implementation process, this should not be postponed to the final phase of the completion report. The UMI served a very useful purpose in gathering key industrial information and in preparing informative as well as insightful reports on trends affecting their competitiveness. The Bank's initiative in developing a Survey of Project beneficiaries also prove X ve'y helpful in developing an objective assessment of the outcome. O At the same time, dissemination of project information and effective consultations with market players is important during project implementation. In view of the extensive research and valuable information produced by the UMI, a more useful approach may have been periodic, perhaps quarterly, seminars for executives to discuss the latest trends in the industrial sector and to seek their comments in terms of their own experiences. O Flexibility in conditionality assures continuity of the project while avoiding tense relations between the Bank and the borrower. An innovative condition of the IRDP was that disbu:rsements to the automotive sub-sector were subject to the government adopting a liberalization of the vehicle assembly industry. Because of the government's failure to adopt such a policy, no sub-loans to the automotive industry were approved. Nevertheless, the project was able to support lending to other industries. If a more rigid requirement of full compliance with all conditions had been inserted in the loan agreement, the outcome might have been less successful. O The establishment of environmental screening mechanisms is a common strategy now used in the Bank for FILs and sectoral investment operations. Howe) ., these procedures need to be fully spelled out in project documents as well as complete agreement among all relevant actors. In addition, the assignment of functions to executing units should be carefully evaluated as to its practical -- and legal -- implications. o The design of labor adjustment assistance programs may utilize a strategy which focuses exclusively on workers following layoff decisions or more upstream as part of firms' efforts  13 to regain market competitiveness and forestall layoffs.. Eligibility criteria need to be carefully defined to fit the target clientele, strategy and performance expectations adopted. The design should also be very carefully tailored to the corporate culture of the country involved, in particular ensuring that it is compatible with labor-management relations and layoff practices. Also, institutional commitment to and its efficient internalization of such an innovative program needs to be particularly strong when it integrally depends upon private sector collaboration for its success.  ANNEX I Page I of 6 INDUSTRIAL RESTRUCTURING AND DEVELOPMENT PROJECT Matrix of Key Project Policy and Institutional Adjustments T I Recent/Present II II I Policy Area & Objective I Policy ; Adjustment I Responsibility I Action By It. Trade Policy I I I I I | (a) Replace QRs with I QR (prior license) I Convert QRs to equivalent I Min Economic I I tariffs and the I requirements or import tariffs. Development I I exchange rate as the I prohibitions cover 82% main instruments of I of domestic production; I (i) Announce Phase I program to I Achieved I protection. a pplications for prior I replace QRs with tariffs. IFebruary 19901 | I licenses are denied if I I I there is significant I (ii) Initial movement of 1921 I I Achieved I I I domestic production. tariff positions from prior I I Sept. 1990 I I l license to free list. I I I I C(iii) Reduce production coverage j I Achieved | I lI of QRs to 44%. I Sept. 1990 I I i (iv) Eliminate QRs excepting tho-I I Achieved I I I | se associated with health, I I November I safety and limited agricul- I I 1990 ture com,odities I I a (b) Increase import coa- I Fourteen tariff rates I Reduce average level end i Min Finance j i I petition and reduce r ranging from 0% to 200%. I dispersion of tariffs. I I anti-export bias by I | reducing and rationa-I Average tariff (includingl(i)Import weighted average tariff I I Achieved lizing protection. I 18X surcharge) is 4S%. I (including surcharges) reduced I I September I to 3OX and tariff rate I I 199W. I ||I categories reduced to 10. I I I I ~~~~ ~ ~ ~~~~~~~~I I II l I 1(H) Announce the tariff structurel I Achieve (maximum, imported-weighted I I Novmber I average including surcharge, I I 1990. number of rates) for the end I I of Phase II: 23X, 1X (inclu-I I ding surcharge), 4 tariff I I rates. I I I I I I I I I, __________________________________ I ________________________________~.I. - ___________________________________________ I ,_____________,______ I, _______________I I  ANNEX I Page 2 of 8 INDUSTRIAL RESTRUCTURING AND DEVELOPMENT PROJECT Matrix of Key Project -olicy and Institutional Adjus'ents I Policy Area A Obje .tive I Recent/Present Policy I Adjustment I Responsibility Action By I I I I I I -I Law 75 surcharge of 18% j(i) Include surcharge in final MinFinance I Achieved on CIF cost plus tariff Itarget tariff under trade progrom,l I February land announce publically a I and Novem-1 I I I I ber 199S. I I 1(ii) Reduce progressively I I Achieved I I t01(13% at present) I I Sept. 190 I I (c) Facilitate exports. IPIan Vallejo application- I Revise operation so as to make Min Eco Dev I Achieved i Ito- approval time averagesi approval not exceed about 10 daysl I June 1990 | I labout 27 days I for new applications and 2 days I I I I I for changes I 12. Domestic Comptition I Polc. I I I I I I V27r1_c1I II I I (a) Lower barriers to I Concordato Law - regula- I Adopt regulations/adolnistratlon I Superintendencyl Law revised | I market exit I tions permit firms long I to *xpedite concordsto process I de Sociedades December andl I I delays in restructuring A